Background

Well before the Financial Services Royal Commission (FSRC) commenced, several enquiries and reports had questioned the counterintuitive exception in the Corporations Regulations that severed claims operations from the other compulsory obligations of insurers with an Australian Financial Services Licence (AFSL). Consequently, there was already long standing, concerted pressure for change.

In fact, historically, consumers did have the benefit of substantial legal protections in the Insurance Contracts Act 1984 and more recently, in the codes of practice put in place by the life and general insurance industries.

However, Commissioner Hayne observed that ‘the intrinsic value of an insurance product lies in the ability to make a successful claim when an insured event occurs’ and saw adding claims handling to AFSL obligations as a priority. This resulted in recommendation 4.8 of the FSRC to remove the exemption.

It became one of the recommendations the government was quickest to move on, which has now progressed through consultation phases and into draft legislation, being the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020: claims handling (Claims Handling Bill).

But what does the removal of the claims carve out mean in practical terms for life insurance claims professionals?

The Claims Handling Bill

The key feature of the Claims Handling Bill is to introduce a new ‘financial service’ of ‘handling and settling an insurance claim’ .

This new financial service will be just like the other obligations under s912A of the Corporations Act 2001, which is to say, compliance with the same is obviously a critical objective of any AFSL holder.

More specifically, AFSL holders must provide financial services ‘efficiently, honestly and fairly’ (s 912 A(1)(a)). The Explanatory Memorandum (EM) to the Claims Handling Bill makes it clear that making sure that insurers comply with these obligations when they deal with claims and that ASIC has the power to investigate compliance with them as potential licence breaches, are the major objectives of the proposed new legislation.

The Corporations Act already requires the mandatory self-reporting of breaches of licence conditions and the most immediate effect of the change will be to bring a breach of these obligations in claims handling into the ambit of the compliance structures that licensees have created to monitor and report significant breaches to regulators already.

What Activities are covered in 'handling and settling an insurance claim’?

Falling within the definition of ‘handling and settling an insurance claim’ will be a range of mainstream claims activities such as:

• making a recommendation or stating an opinion that could influence a decision whether to make an insurance claim;
• assisting another person to make an insurance claim;
• assessing whether an insurer is liable under an insurance product;
• making a decision to accept or reject all or part of an insurance claim;
• quantifying an insurer’s liability under an insurance product;
• offering to settle all or part of an insurance claim; or
• satisfying a liability of an insurer under an insurance claim.

Where these claims activities are outsourced, by an insurer, which occurs far more in the general insurance industry, this creates potentially complex issues for claims departments in ensuring external providers are appropriately licenced. The life industry will of course also need to keep this in mind when outsourcing as well.

When the personnel that have to perform an activity are subject to ALFS requirements, a company has a number of other important obligations that apply in relation to them. We will deal with these in a moment.

Examples of Breaches 

The EM contains several examples, relevant to the life industry, of situations that the government considers will be breaches of the obligation to act ‘efficiently, honestly and fairly’ in relation to a claim.

Example 1.5 talks about the assessment of a total and permanent disability claim where the insurer arranges an appointment with an independent orthopaedic surgeon to provide an opinion regarding the claim.

After the medical professional provides an opinion that is favourable to the claimant, in the example, the insurer then seeks the opinion of a second and then a third independent orthopaedic surgeon, requiring the claimant to undergo the same medical examination multiple times and causing significant delays.

The EM concludes “this would likely be unfair and inefficient, as the insurer is not handling and settling (the) claim in a timely fashion, nor in the least onerous and intrusive way”.

There is a similar example in relation to an IP claim, in which the insurer unreasonably refuses to reschedule a medical appointment and advises the claimant her payments may be suspended if she does not attend when a support person is not available to attend with her.

The example concludes by stating that “this would likely be unfair as the insurer is not providing adequate support when handling and settling an insurance claim for a claimant they know to be vulnerable”.

Implications

While making claims handling a financial service arguably intensifies the consequences of failing to meet the reasonable expectations of claiming consumers to be dealt with honestly, efficiently and fairly, many in the industry would argue that the LICOP has already placed a satisfactory check on abuse in these areas and the industry has already improved standards and moved on. That is, the claim functions of insurers, steeled by several years of LICOP compliance (and with a new version on the way) are already where they need to be for the post FSRC environment.

If so, perhaps the most meaningful and lasting aspect of the reform may lie in the other important obligations placed on companies when they provide claims handling as a financial service under their AFSL.

That is, s 912A of the Corporations Act also includes as key requirements obligations to:

• have adequate financial, technological and human resources to provide the financial services covered by the licence (s 912A(1)(d));
• maintain the competence to provide those financial services (s 912A(1)(e)); and
• ensure that its representatives are adequately trained (ss 912A(1)(f)).

(Sections 912A 1 (d) to (f).)

These statutory requirements clearly support the life industry’s growing focus on structured career paths and training, as well as a developing industry's wide understanding of standard claims competencies.

As a result, bringing claims functions into the AFSL compliance mainstream is likely to continue to drive improvement that will not only benefit consumers but also companies and claims professionals as well.